Wednesday, October 17, 2012
Raise Luxury Prices If Equivalents Drop Prices
Yes, that tactic can actually increase sales with status-oriented items.
Researchers at University of Texas-Dallas explored instances in which a supplier of a high-prestige item drops the price. One result of such a drop is that demand increases for a substitutable item with a higher price. The logic goes like this for the consumer, perhaps at a subconscious level: “If the price is now lower, more people will be able to buy the item. This means the people in my social group won’t be as impressed when I show them I purchased this item. However, if I buy this other item, which carries a higher price, my purchase will impress others more because it’s distinctive.”
As a retailer, you can respond to higher demand by raising the price on that item. Not a huge increase, to be sure, but a nudge upwards.
It never pays off in the long run to gouge shoppers with exorbitant prices. But are you trimming profit margins on many products you carry in order to keep customers coming? View the increase in price of the status-oriented product as an example of setting a healthy margin on multi-solution merchandise. The item on which your nudging the price upwards is serving both a utilitarian function—telling time if it’s a watch—and the status function. Boosting margins on multi-solution products may be the right solution for you.
A story to illustrate how this works: Soon after the breakup of the USSR, a new, highly entrepreneurial and status-conscious mindset took hold in the motherland.
Sergei and Nikolai, two businessmen enjoying prosperity in the changing economic order, happen to see each other in a Russian shopping district as Nikolai is walking out of a men’s clothing store.
“What a surprise to see you here, Nikolai,” says Sergei.
“Ah, Sergei, and I’m equally surprised to see you. I came to this neighborhood to buy a new tie. I’ll open my overcoat for a moment to show it to you.”
“Thank you, Nikolai. And how much did you pay for this fine tie?”
With a tone of pride, Nikolai says, “This tie cost me 2,500 rubles.”
“Oh, Nikolai, how foolish of you. Directly across the street, you could have bought an equally excellent tie for 5,000 rubles.”
Click below for more:
Set Healthy Margins on Multi-Solution Products
Plumb for Consumers’ Desire to Slum
Posted by Bruce D. Sanders, PhD at 9:00 AM